The Road Ahead for ETFs

Transcription

1 The Road Ahead for ETFs

2 Global ETF assets and number of funds 1993 to February 2010 US$ billions 1,200 1, Totalassets assets Number of funds Number of funds 2,500 2,000 1,500 1, Feb Source: BlackRock, ETF Landscape Industry Review.

3 ETFs market share is increasing ETFs as a percentage of all NYSE equity trading volume Source: NYSE.

4 U.S. ETF assets and number of funds 1993 to 2009 US$ billions Totalassets assets Number of funds Number of funds Source: BlackRock, ETF Landscape Industry Review.

5 U.S. ETF fund assets February 2010 Hybrid <1% Total assets=us$750 billion February 2010 Bonds 15.0% Global 26.3% Broad based equity 38.5% Sector 20.2% Source: Investment Company Institute.

6 Active or passive: Which is a better management style? Total return index, 2002= Money market 140 S&P AAA corporates Sources: Bloomberg, Milken Institute.

7 Return on selected asset classes 2000 to March 2010 As of March 2010, $100 investment in 2000 gives you: 300 $ $100 $109 $162 $193 $ S&P 500 AAA corporates Commodities Treasuries High yield bonds Emerging markets Sources: DataStream, Milken Institute.

8 Federal Reserve has little maneuvering room What is next? Percent 3 Effective federal funds rate 2 1 Target federal funds rate Apr. 30, 2008: 2% Oct. 8, 2008: 1.5% Oct. 29, 2008: 1% Dec. 16, 2008: % 0 Jun 2008 Sep 2008 Dec 2008 Mar 2009 Jun 2009 Sep 2009 Dec 2009 Mar 2010 Sources: Federal Reserve, Milken Institute.

9 Steve Baffico slides

10 ETFs vs. open-end mutual funds Assets held,us$ billions U.S. listed ETF growth US$ billions / Number of ETFs $9,000 $8,000 $7,000 $6,000 $5,000 $4,000 $3,000 $8,801 1,200 1, $2,000 $1,000 $0 Open-ended mutual funds $837 Exchangetraded funds YTD Assets Total ETFs Sources: Morningstar, Bloomberg, Claymore Securities, Inc. All data as of 4/16/2010 and includes all U.S. ETF and open-end mutual funds.

11 ETFs vs. open-end mutual funds Estimated net flows (US$ millions) U.S. Exchange-Traded Funds U.S. Open-End Mutual Funds March 2010 Q March 2010 Q U.S. stock (2,926) (14,479) U.S. stock 1,316 1,600 (25,748) International 1, ,533 International 6,642 19,725 25,532 stock stock Balanced Balanced 1,372 6,153 (3,290) Taxable bond 4,435 8,223 35,319 Taxable bond 31,731 74, ,465 Municipal bond ,387 Municipal bond 3,905 14,002 72,123 Alternative 1,297 2,427 24,211 Alternative 1,485 6,120 14,103 Commodities 758 (1,022) 26,509 Commodities 1,080 3,091 10,224 Total 19,734 7, ,820 Total 47, , ,409 Sources: Morningstar Direct Fund Flows, April All asset classes are defined by Morningstar.

12 Changing ETF landscape Annual ETF net cash flows by market segment Most International Equity International Equity International Equity Large-Cap Large-Cap Fixed Income Large-Cap Large-Cap USSector & Industry International Equity USSector & Industry International Equity USSector & Industry Fixed Income Commodity Fixed Income Fixed Income Commodity Small-Cap USSector & Industry Small-Cap USSector & Industry International Equity Lev/Inverse Dividend Income Mid-Cap Fixed Income Lev/Inverse Lev/Inverse USSector & Industry Net Cash Flows Fixed Income Dividend Income Lev/Inverse Commodity Commodity Currency Mid-Cap Commodity US Broad-Mkt Equity Mid-Cap Small-Cap Global US Broad-Mkt EquityUS Broad-Mkt Equity Global US Broad-Mkt Equity Mid-Cap Mid-Cap Commodity Global Currency Global US Broad-Mkt Equity Small-Cap Global l Small-Cap Mid-Cap Currency Global l Dividend id d Income Dividend Income Dividend Income Currency US Broad-Mkt Equity Large-Cap Small-Cap Dividend Income Alternative Large-Cap Least Source: Exchange Traded Funds Quarterly Report, February 23, 2010 by Dominic Maisters Morgan Stanley. Assets classes defined by Morgan Stanley.

13 Asset class trends ETFs vs. world market There is currently a disparity between ETF asset class market share breakdown and the world market capitalization. World market capitalization ETF Market Share by Asset Class Percent As of 1/31/ MSCI EM 13% MSCI United States 43% MSCI Canada 4% MSCI EAFE 40% Source: Exchange Traded Funds Quarterly Report, February 23, 2010 by Dominic Maisters Morgan Stanley. Assets classes defined by Morgan Stanley. See last slide for index definitions. Indices are unmanaged and it is not possible to invest directly in an index.

14 ETFs average daily volume Number of funds % of total Over 1 Million Shares % 100,000 to 999, % 25,000 to 99, % Under 25,000 Shares % Less than 30 Days of Trading % Total % Source: Claymore Securities, Inc. and Bloomberg as of 4/16/2010. Data includes all U.S. ETFs.

15 Liquidity actual vs. perceived ETF s average daily volume (ADV) Underlying securities ADV ETF s ADV/ Underlying securities ADV OTP Claymore /Ocean Tomo Patent ETF $110,722 $67,134,562, % IWL - ishares Russell Top 200 Index Fund $42,539 $76,456,668, % PJO - PowerShares FTSE RAFI Japan Portfolio $164,450 $8,615,948, % IWC - Russell Microcap Index Fund $11,057,495 $3,042,111, % EPI - Wisdom Tree India Earnings Fund $24,501,835 $2,041,739, % PPTL - ETFS Physical Platinum Shares $16,616,392 $326,789, % LQD - ishares iboxx Investment Grade Corporate Bond Fund $81,864,076 $795,842, % ETF s ADV is the ETF closing price multiplied by 30-day average daily volume. Underlying Securities ADV is the Individual securities closing price times its 30 day average daily volume added to the same calculation for other securities that comprise the ETF. The ETFs selected are not to be considered a recommendation by the panel, but an illustration of the broad spectrum of liquidity among ETFs and their underlying securities. Consider the investment objectives, risks, charges and ongoing expenses of any ETF carefully before investing. The prospectus or summary prospectus, if available, contains this and other relevant information. Please read the prospectus carefully before investing. To obtain a prospectus, visit the firms respective websites or contact a securities representative. Source: Bloomberg as of 4/14/2010

16 ETFs currently filed with SEC Number of ETFs Source: Bloomberg for all data except for Claymore as of 4/11/2010. Claymore data provided by Claymore Securities, Inc. Note: All ETFs currently on file with SEC, but not yet available for purchase.

17 U.S. ETF universe Inverse ETFs 1% Leveraged inverse ETFs 4% Leveraged long ETFs 5% Non-leveraged or inverse ETFs 90% Source: Bloomberg as of 4/11/2010. Data includes all U.S. ETF.

18 Important information Index Definitions: The MSCI EAFE Index is broadly diversified and comprises 21 MSCI country indices and over 1,100 securities representing the developed markets outside of North America: Europe, Australasia and the Far East. The MSCI Emerging Markets Index measures equity market performance in the global emerging markets and consists of over 800 securities from 26 countries. The MSCI Europe Index consists of around 600 stocks in 16 developed European countries. Most of the index is comprised of companies in the UK, France, Switzerland and Germany. The MSCI Canada Index consists of stocks representing Canadas larger and most established public companies. It is floatadjusted and market capitalization weighted. MSCI targets that their indexes represent about 85% of total market capitalization by country and industry. The MSCI USA Index is a free float adjusted market capitalization index that is designed to measure large and mid cap US equity market performance. Indices are unmanaged and it is not possible to invest directly in an index. The comments during this presentation should not be construed as a recommendation, but as an illustration of broader themes. You are cautioned that any forward-looking statements are subject to significant business, economic and competitive uncertainties and actual results could be materially different. Information presented during this presentation is not a solicitation for any investment product. This material has been prepared using sources of information generally believed to be reliable. No representation can be made as to its accuracy. Claymore Securities, Inc. Member FINRA/SIPC (04/2010)

19 David Kastner slides

20 Schwab mutual fund rating system may be applicable to active ETFs Quantitative system to evaluate actively-managed mutual funds on A-F scale Rates funds within Morningstar categories Forward-looking, multi-factor approach Not one size fits all Rating system factors Alpha: Risk- and style-adjusted performance Adjusts for equity, capitalization, style, term to maturity, credit default, and sector-specific risks Measured over non-overlapping overlapping short, medium, and long periods Expenses operating expense ratio (OER) Fund family resources Fund size Cash inflows Security diversification

21 What are Exchange Traded Funds? Similarities and differences to mutual funds ETFs Mutual funds Diversification Same Same Actively managed Less More Trading flexibility More Less Accessibility More Less Transparency More Less Cost effectiveness More Less Tax efficiency More Less *ETFs are generally more cost effective when trading activity is low. Bear in mind that each trade of an ETF may incur a commission. Some mutual funds are managed for cost effectiveness and tax efficiency.

22 Tax efficiency of ETFs Tax advantage of ETFs over mutual funds In-kind exchange process gives ETFs an upper hand in terms of taxes due to capital gains distributions Five-year tax cost ratios: Average mutual fund in various Morningstar categories versus largest ETF Fund category Average mutual fund Largest ETF Difference Large blend 0.86% 0.57% 0.29% Small blend 1.25% 0.42% 0.83% Foreign large 1.24% 0.87% 0.37% Emerging market 1.77% 0.55% 1.22% Intermediate term bonds 1.61% 1.55% 0.06% Source: Morningstar. Annualized data as of 12/31/2009. The ticker symbols for the largest ETF in the large blend, small blend, foreign large, emerging market, and intermediate term bonds categories are: SPY, WM, EFA, EEM, AGG respectively. For more information on tax cost ratios, see disclosures at the end of the presentation.

23 ETF portfolio management Defining the process Strategic asset allocation Construct highly diversified portfolios to meet your desired risk tolerance ETF selection Select ETFs that match the index or viewpoint Portfolio tilts Make small tactical adjustments within asset groups Risk control Limit deviations from the strategic allocation Ongoing monitoring and rebalancing

24 ETF portfolio management Defining the process Strategic asset allocation Construct highly diversified portfolios to meet your desired risk tolerance ETF selection Select ETFs that match the index or viewpoint Portfolio tilts Make small tactical adjustments within asset groups Risk control Limit deviations from the strategic allocation Ongoing monitoring and rebalancing

25 Strategic asset allocation Long-term strategic allocation specifically for ETFs Additional diversification, inflation protection Additional diversification, current income Additional global and currency diversification, long-term growth Long-term growth Int'l emerging markets Int'l small cap Int'l large cap Stability & liquidity Commodities Cash TIPS Inflation protection ti REITs Treasurys U.S. micro cap U.S. small cap U.S. large cap Agencies Corporates Securitized High yield Int'l bonds Additional global and currency diversification Risk control, current income, diversification Current income

26 Strategic asset allocation Select the appropriate portfolio based on your investment characteristics Conservative income Income with growth Balanced Real Assets 5% Fixed Income 70% Cashh 25% Int'l Stocks 8% US Stocks 11% Real Assets 6% Balanced with growth Growth Aggressive growth Int'l Stocks 25% Real Assets 11% Cash 5% Fixed Income 30% US Stocks 29% Int'l Stocks 33% Real Assets 11% Cash 5% Cash 20% Fixed Income 55% Fixed Income 13% US Stocks 38% Real Assets 10% Int'l Stocks 17% Int'l Stocks 40% US Stocks 20% Real Assets 9% Cash 5% Cash 15% Fixed Income 38% US Stocks 46%

27 ETF portfolio management ETF selection CSIA considers a variety of factors in choosing among eligible ETFs: How closely l the underlying index matches the sub-asset class or the viewpoint i Structure of the index Structure of the ETF Fit of the ETF with other funds in the portfolio Tracking error Expenses Discounts and premiums to NAV Liquidity History of the ETF management firm

28 David Hall slides

29 ETFs now a viable alternative for institutional investing ETF use among U.S. pension funds, endowments and foundations has grown to about 14% Almost half [of that group] say that they employ ETFs for tactical reasons; another one-fifth indicated that they used ETFs for strategic reasons Tactics include temporal adjustments to market exposures, cash equitization and manager transitions Source: Greenwich Associates ETFs Gain Foothold in Institutional Market, March 2010

30 What has driven this growth? Techniques to separate and harvest alpha require pure beta to adhere to a risk budget Increasing preference for passive management, especially for efficient subasset classes Tactical flexibility Cost advantages due to a shift in the tradeoffs

31 Examining the tradeoffs 3 ways to create passive exposure: Hire an external manager DIY: create an internal passive investment process DIY: use ETFs

32 Hire an external manager Considerations Initial search costs, due diligence, contracts, etc. Ongoing monitoring and due diligence Coordination with other investments/investors involves a third party Securities lending may be available Management fee hierarchy: Open-end mutual funds have highest h costs Separate accounts Collective trusts have lowest costs Transition costs if funds are re-allocated in whole or in part

33 Build an internal investment process Considerations Staffing Initial and ongoing recruitment, compensation issues, training Administration Vendor relationships, custody, data management Compliance Research and danalysis tools Managing tracking error requires skill and experience Headline risk lurks as a consequence Customizable beta may be achievable at lower cost

34 Use ETFs Considerations Minimal search costs Due diligence on ETF fund manager may pose a challenge Low entry and exit friction Immediate, and in some cases deep, liquidity Beta can become a tactical tool Securities lending a possibility For taxable investors, may be more tax efficient

35 Materials Notice This material contains confidential and proprietary information of Wilshire Associates and is intended for the exclusive use of the person to whom it is provided. It may not be modified, sold or otherwise provided, in whole or in part, to any other person or entity without prior written permission from Wilshire Associates. The information contained herein has been obtained from sources believed to be reliable. Wilshire Associates gives no representations or warranties as to the accuracy of such information, and accepts no responsibility or liability (including for indirect, consequential or incidental damages) for any error, omission or inaccuracy in such information and for results obtained from its use. Information and opinions are as of the date indicated, and are subject to change without notice. This material is intended for informational purposes only and should not be construed as investment t advice. Wilshire Associates assumes no duty to update any such statements. t t This Presentation may include estimates, projections and other forward-looking statements. Due to numerous factors, actual events may differ substantially from those presented. Copyright 2010, Wilshire Associates Incorporated. All rights reserved.

36 Raman Suri slides

37 $11 trillion investment universe is only part of the story Money market funds, $2,900 Asset under management US$ billions ETFs, $823 Mutual funds, $7,300 New opportunities ETFs Increased Institutional Usage: Tactical Adjustments Rebalancing Portfolio Completion Long & Lend Increased use in Defined Contribution Plans Increased use in 529 and other advised platforms Increased use by Sovereign Wealth Funds Source: BlackRock, Morningstar as of 3/31/10

38 How are institutions using ETFs? Strategy Cash Equitization Hedging Transitions ETF Overlay Portfolio Completion Tactical/Macro Adjustments Securities Lending Objective Maintain liquidity while remaining fully invested Ability to go long a sector s stocks and short* corresponding ETF. ETFs are attractive alternative to swaps due to their operational simplicity and lack of counterparty risk. Maintain liquid beta exposure while searching for new managers Reduce implementation time and t-costs to change exposures in asset classes Help ensure a portfolio s complete diversification by helping to minimize benchmark risk while maintaining alpha objectives Over- or underweight certain styles, region/specific countries, or target duration or credit quality on the basis of short-term views Potential for investors to achieve index-like returns, plus additional lending returns due to borrower demand for certain ETFs** Duration of Allocation * With short sales, you risk paying more for a security than you received from its sale. **There is no guarantee that there will be borrower demand for shares of ETFs, or that securities lending will generate any level of income. Distributions paid out of the Fund s net investment income, including income from securities lending, if any, are taxable to investors as ordinary income.

39 Seven strategic questions to ask when evaluating ETFs 1) What is the structure of the ETF? 2) What are the underlying instruments used by the ETF to achieve its investment exposure? 3) What are the total costs to consider? 4) Who is the company and the management behind the funds? 5) Can ETF liquidity support institutional-sized sized transactions? 6) Are there institutional resources available to support customized needs and questions? 7) Does the ETF participate in securities lending?

40 ETF liquidity 6 of the top 10 most actively traded US equities by $ volume are ETFs ETF market share as share of total US monthly equity $ trading volume was 27% Product Ticker Shares (M) $Billions % SPDR S&P 500 SPY 12,168 1, % Apple Inc. AAPL 1, % PowerShares QQQ QQQQ 5, % ishares Russell 2000 IWM 3, % Bank of America BAC 12, % ishares MSCI Emerging Markets EEM 4, % Direxion Financial Bull 3x FAS 1, % Google GOOG % Goldman Sachs GS % SPDR Gold Trust GLD 1, % Total of Top 10 3,048 21% Source: BlackRock, Bloomberg as of 3/31/10 Information on Funds and securities is provided strictly for illustrative purposes and should not be deemed an offer to sell or a solicitation of an offer to buy shares of any funds or securities, other than ishares Funds that are described in this presentation.

41 ETF liquidity offers price improvement 20,000 16,000 12,000 8,000 4,000 ishares MSCI Emerging Markets (EEM) Annual shares traded,millions EEM trading volume (left axis) Spread (right axis) EEM current underlying portfolio spread (right axis) Sources: NYSE Arca, Bloomberg, as of 12/31/09. Spread, US$ ishares Russell 2000 (IWM) Annual shares traded,millions d Spread, US$ 30, ,000 20,000 15,000 10,000 5, IWM trading volume (left axis) Spread (right axis) IWM current underlying portfolio spread (right axis)

42 Fixed income ETFs offer price improvement ishares Barclays Aggregate Bond (AGG) ishares iboxx $ Investment Grade Bond (LQD) Annual shares traded, millions Spread, US$ Annualshares traded, millions Spread, US$ LQD trading volume (left axis) Spread (right axis) AGG trading volume (left axis) Spread (right axis) AGG current underlying portfolio spread (right axis) Sources: NYSEArca, Bloomberg, 12/31/09. LQD current underlying portfolio spread (right axis)

43 Carefully consider the ishares Funds investment objectives, risk factors and charges and expenses before investing. This and other information can be found in the Funds prospectuses, which may be obtained by calling iShares ( ) or by visiting Read the prospectuses carefully before investing. Investing involves risk, including possible loss of principal. Bonds and bond funds will decrease in value as interest rates rise. In addition to the normal risks associated with investing, international investments may involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles or from economic or political instability in other nations. Emerging markets involve heightened risks related to the same factors as well as increased volatility and lower trading volume. Investments in smaller companies typically exhibit higher volatility. The strategies discussed are strictly for illustrative and educational purposes and should not be construed as a recommendation to purchase or sell, an offer to sell or a solicitation it ti of an offer to buy any security. There is no guarantee that any strategies discussed will be effective. With short sales, you risk paying more for a security than you received from its sale. There can be no assurance that an active trading market for such shares will develop or be maintained.

44 The information provided is not intended to be a complete analysis of every material fact respecting any strategy and has been presented for educational purposes only. Asset allocation models and diversification do not promise any level of performance or guarantee against loss of principal. Shares of ishares Funds are bought and sold at market price (not NAV) and are not individually redeemed from the Fund. Mutual funds and ishares Funds are obliged to distribute portfolio gains to shareholders by year-end. These gains may be generated due to index rebalancing or to meet diversification requirements. Trading shares of the ishares Funds will also generate tax consequences and transaction expenses. Certain traditional mutual funds can be tax efficient as well. When comparing stocks or bonds and ishares Funds, it should be remembered that management fees associated with fund investments, like ishares Funds, are not borne by investors in individual stocks or bonds. The annual management fees of ishares Funds may be substantially less than those of most mutual funds. Buying and selling shares of ishares Funds will result in brokerage commissions, but the savings from lower annual fees can help offset these costs. Neither BlackRock Institutional Trust Company, N.A., and its affiliates nor SEI and its affiliates provide tax advice. Please note that (i) any discussion of US tax matters contained in this communication cannot be used by you for the purpose of avoiding tax penalties; (ii) this communication was written to support the promotion or marketing of the matters addressed herein; and (iii) you should seek advice based on your particular circumstances from an independent tax advisor. Index returns are for illustrative purposes only and do not represent actual ishares Fund performance. Index performance returns do not reflect any management fees, transaction costs or expenses. Indexes are unmanaged and one cannot invest directly in an index. Past performance does not guarantee future results.

45 The ishares Funds are not sponsored, endorsed, issued, sold or promoted by Cohen & Steers Capital Management, Inc., Dow Jones & Company, Inc., European Public Real Estate Association ( EPRA ), FTSE International Limited ( FTSE ), FTSE/Xinhua Index Limited ( FXI ), iboxx, J.P. Morgan Securities Inc., MSCI Inc., Morningstar Inc., The NASDAQ OMX Group, Inc., National Association of Real Estate Investment Trusts ( NAREIT ), New York Stock Exchange, Inc., Russell Investment Group, or Standard & Poor s s, nor are they sponsored, endorsed or issued by Barclays Capital. None of these companies make any representation regarding the advisability of investing in the Funds. Neither SEI, nor BlackRock Institutional Trust Company, N.A., nor any of their affiliates, are affiliated with the companies listed above. FXI does not make any warranty regarding the FTSE/Xinhua Index. All rights in the FTSE/Xinhua Index vest in FXI. Neither FTSE nor NAREIT makes any warranty regarding the FTSE NAREIT Real Estate 50/Residential/Retail/Mortgage or Industrial/Office Index; all rights vest in NAREIT. Neither FTSE nor NAREIT makes any warranty regarding the FTSE EPRA/NAREIT Developed Real Estate ex-us/north America/Europe/Asia Index; all rights vest in FTSE, NAREIT, and EPRA. All rights in the FTSE Developed Small Cap ex- North America Index vest in FTSE. FTSE is a trade- and servicemark of London Stock Exchange and The Financial Times Limited; Xinhua is a trade- and servicemark of Xinhua Financial Network Limited. The ishares Funds are distributed by SEI Investments Distribution Co. (SEI). BlackRock Fund Advisors (BFA) serves as the investment advisor to the Funds. BFA is a subsidiary of BlackRock Institutional Trust Company, N.A., neither of which is affiliated with SEI BlackRock Institutional Trust Company, N.A. All rights reserved. ishares is a registered trademark of BlackRock Institutional Trust Company, N.A. All other trademarks, servicemarks or registered trade- marks are the property of their respective owners. is Not FDIC Insured No Bank Guarantee May Lose Value